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Fixed cost allocation based on the principle of efficiency invariance in two-stage systems

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  • An, Qingxian
  • Wang, Ping
  • Emrouznejad, Ali
  • Hu, Junhua

Abstract

Fixed cost allocation among groups of entities is a prominent issue in numerous organisations. Addressing this issue has become one of the most important topics of the data envelopment analysis (DEA) methodology. In this study, we propose a fixed cost allocation approach for basic two-stage systems based on the principle of efficiency invariance and then extend it to general two-stage systems. Fixed cost allocation in cooperative and noncooperative scenarios are investigated to develop the related allocation plans for two-stage systems. The model of fixed cost allocation under the overall condition of efficiency invariance is first developed when the two stages have a cooperative relationship. Then, the model of fixed cost allocation under the divisional condition of efficiency invariance wherein the two stages have a noncooperative relationship is studied. Finally, the validation of the proposed approach is demonstrated by a real application of 24 nonlife insurance companies, in which a comparative analysis with other allocation approaches is included.

Suggested Citation

  • An, Qingxian & Wang, Ping & Emrouznejad, Ali & Hu, Junhua, 2020. "Fixed cost allocation based on the principle of efficiency invariance in two-stage systems," European Journal of Operational Research, Elsevier, vol. 283(2), pages 662-675.
    • Handle: RePEc:eee:ejores:v:283:y:2020:i:2:p:662-675
    DOI: 10.1016/j.ejor.2019.11.031
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